Tech professionals have such an interesting life from a stock perspective. You work hard to understand your offer letter, these weird stock things, and what that means from a tax perspective. The fun doesn’t end there – now an acquisition turns your beautiful plans into reality!
What happens to your stock in an acquisition depends on a few things.
- The kind of acquisition it is
- The structure of your company
- What kinds of stock and/or options you have vested
Types of Acquisitions
Acquisition Type – LLC or Partnership
These can be quite a bit trickier. An LLC or partnership may be acquired for their stock or for the assets within the LLC/partnership.
If the LLC / Partnership is acquired by an ‘asset sale’, then your next K-1 will show the character of those gains. This may include: capital gains, ordinary income, interest income, debt cancellation, etc. It may be harder to estimate the impact of the sale. We recommend reaching out to your tax advisor for more information in this situation.
Acquisition Type – C Corps
Let’s say Company X is going to buy Company Y.
Company X will offer a ‘purchase price’ and this can be made up of a few components:
- Cash,
- Company X stock, and/or
- Promissory notes
Depending upon the offer components, this will trickle down in what you personally receive for stock held.
Retention bonuses or retention stock grants will be made to individual star performers. The goal is to retain employees to ensure a smoother transition into owning Company Y.
Many executives find themselves terminated in the acquisition, so review your original contract for an acceleration clause. Does this sound new to you? If so, then we recommend negotiating this in your next compensation package. Find out more here.
What happens if I own stock in a company that gets bought out?
When you own stock in a company, stock certificates will be exchanged for either cash, cash and stock, or stock. It doesn’t matter if the stock is acquired through vesting RSUs or exercising stock options.
Most of the Big Tech companies tend to purchase startups for all cash. Smaller tech companies, who are acquiring another company for technology or market share, may not have the cash to put down. In those cases, a cash and stock purchase makes more sense.
Generally, the timeline goes like this:
- Your company notifies you of the acquisition
- You parse through legalese to understand if it is a cash purchase, stock and cash purchase, or other type of purchase
- There will be an estimated closing date announced where the majority of the transfer will occur (generally within 6 months)
- You will be subject to an ‘escrow’ where a certain % of your stock is held until all expenses are settled (within one to two years)
If you acquired the stock long ago, this is the time to review whether you meet the Qualified Small Business Stock exclusion. Read our blog post about it here.
If you exercised options in the last year, you will want to understand what that means for you tax-wise. One of the down sides of exercising ISOs is when you decide to take on a big AMT tax bill in hopes that the price will rise. Only, you find out your company will be acquired less than a year later. In that case, you have a big AMT credit and not a high chance of recouping it. Whomp whomp.
Any cash received will be considered a ‘sale of your shares’ and taxable at the time of the acquisition.
Stock and cash received for your company stock will be taxable to the extent cash was received.
A stock for stock transaction means your original basis and purchase date continues on. This will be portioned between the new amount of shares received by the acquiring company.
Clear as mud? Then it’s time to schedule an introductory meeting with us so we can chat through your particular situation.
What happens to my stock options in an acquisition?
Your stock options may go through a similar process, but on the original vesting timeline.
If you hold vested stock options, the company may pay out cash for these or provide you with a new grant in the acquiring company.
Once the acquisition is announced, you will no longer be allowed to exercise stock options. So if you see a lot of closed doors and people you don’t know coming into the office, that may be a sign to ask what’s up and consider your options 🙂
What happens to my future vesting schedule?
If you have unvested stock options or RSUs, these will move to either future cash payouts or new grants of the acquiring company stock.
You may also receive a retention bonus or retention stock grant as a way to motivate you to remain with the acquiring company for 2 additional years.
Should I sell my stock after acquisition?
If your company is acquired for stock, and it is priced very well, consider selling a large chunk. Many announced acquisitions bring the speculation of a beautiful future together and help buoy the stock price.
Most likely, if your company is being acquired, you had a lot of illiquid shares that were more ‘paper money’ than real money. Now is the time to make the most of the opportunity. Prepare for your future by investing in the stock market and considering your options for furthering your community.
Depending on the type of sale, you may have a great opportunity to do some gifting and charitable contributions with stock to minimize taxes.
Congratulations on your acquisition! If you need any help, please schedule some time to chat with us. 🙂
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
